In many industries, ﬁrms give consumers the opportunity to add (at a price) optional goods and services to a baseline product. The aim of our paper is to clarify the effect that offering add-ons has on baseline prices. In order to do that, we develop a theoretical model of add-on pricing in competitive environments with two distinctive features. First, we discuss the choice of offering the add-on, if this entails a ﬁxed cost. Second, we allow ﬁrms to have a varying degree of market power over the add-on. In symmetric equilibria, the presence of add-on always reduces baseline prices. In asymmetric equilibria in which only one ﬁrm offers the add-on, its presence increases the baseline price if the ﬁrm’s market power over the add-on is limited. The latter prediction of the model is conﬁrmed by a hedonic price regression using a dataset of cruises offered worldwide, a situation in which it is possible to control for the level of add-on market power.
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